- Increased rate hike odds, bond yields and dollar strength triple headwind for gold
- Gold tends to fall ahead of FOMC rate hikes
- Gold currently holding up well in spite of circumstances
- Current support $1,238/oz, break below could see targeting of $1,219
- Silver more at risk of deeper correction, could potentially go as low as $17.72/oz
By Ole Hansen
Gold has once again been hit by a triple headwind. The probability of a US rate hike on March 15 has surged and, with it, we are seeing the dollar and bond yields moving higher. At the same time, the US continues to lead a surge in global stocks.
A similar cocktail has on previous occasions triggered a stronger negative price reaction in precious metals and highlights that geopolitical concerns and the prospect of rising inflation continue to attract buyers.
March 15 is building up to a day full of key event risks. Not only do we have an expected rate hike from the Federal Open Market Committee and the expiry of the US debt ceiling holiday, we also have the Dutch election, the first of three important elections this year in Europe.
A reminder of the key drivers which help determine the direction of gold:
The last two times the FOMC raised rates gold reacted negatively in the run-up to the announcement only to rally afterwards. In December 2015, gold lost 2% during the month leading up to the hike, only to rally by 2.6% the following month. The before-and-after reaction to December 2016 was a drop of 5% (Trump's election win playing its part) followed by a 3.4% rally.
Gold is holding up well despite rising yields and a stronger USD as seen below vs the yen.
Gold currently hovers around $1,249/oz which represents a 50% retracement of the July-to- December selloff. The 20-day moving average has provided support during the latest run higher, and today it provides support at $1,238/oz.
A break below could see it target key support at $1,219/oz. This level (being the 38.2% correction of the aforementioned selloff) was the key battleground during January and February. Once it broke, we saw how $1,249/oz and $1,262/oz provided the next levels of interest with the latter being the 200-day moving average and current resistance.
Silver looks more at risk of a deeper correction. It has been hovering around $18.38/oz for the past five days and near the top of its trading channel. A break below $18.23/oz could trigger a swift move lower to $18/oz (200-day and 20-day moving average) and potentially as low as $17.72/oz.
– Edited by Jack Davies
Ole Hansen is head of commodity strategy at Saxo Bank